Private student loans are notorious for being inflexible and for lacking the same types of repayment options as federal loans. Private student loan consolidation is one of the few options available for borrowers to obtain some relief from the burden – whether it’s a lower payment, a lower interest rate, or both.
It can be tough to qualify for, with most refinance/consolidation lenders looking for borrowers who have good income, a good credit score, a low Debt To Income Ratio, and potentially even a cosigner willing to bear responsibility for the loan if the original signer is unable to pay.
There are quite a few lenders who have entered the market, so borrowers have a variety of choices – although all refinance/consolidation lenders are going to offer a similar product and have similar requirements. Most lenders offer both fixed and variable interest rates.
For those who don’t qualify or want a more aggressive approach as far as net savings and length of repayment, the other main option is settlement negotiation (which occurs only under specific circumstances). Consolidation is a relatively non-aggressive approach that offers a decent amount of net savings over the life of the loan, without many downsides for those who qualify.
What Is The Difference Between Refinancing And Consolidating?
Consolidating Student Loans
When it comes to student loans that are private, the terms “refinance” and “consolidation” are often used interchangeably. A consolidation, by definition, is the process of combining multiple loans into one. A refinance is the process of a lender buying a loan and reissuing it at a lower interest rate than what it was originated at. Both of these processes usually happen simultaneously when a borrower either applies to consolidate or refinance a loan.
For federal loans, the term consolidation means something very different; and usually refers to the process of Direct Consolidation – which combines federal loans through the Department of Education and reissues them (as a federal loan) without lowering interest rates. It is also used by federal loan borrowers to get out of default or to gain eligibility for certain programs.
These types of loans can also go through “outside” consolidation or refinance with third party lenders, and many of the lenders who offer this service for privately will also do the same for federal loans. However, there is more to lose when refinancing a loan that’s federal, as this converts it into one that’s private and any federal loan benefits such as payment plan eligibility, Public Service Loan Forgiveness eligibility, etc. are lost. However, private loans going through consolidation/refinance are simply being converted to a different loan with a different private lender.
How Do You Apply For Private Student Loan Consolidation?
Refinance/consolidation is relatively easy to apply for. The lenders usually have an online application process directly on their website, and there are also several sites that allow you to compare and contrast different rates and availability.
To go through the process, you’ll just need to complete the application for each lender you want to apply with. If you’re approved, the refinance/consolidation usually happens pretty quickly, and should be done within a month or two at most.
If you qualify, the new lender will purchase your old loans, and will then reissue you a new loan with the new terms you agreed to – whether it’s a lower interest rate, different payment amount, or a combination of both. Then, you just make your monthly payment to your new lender.
Typically, unless you have loans with Wells Fargo, Discover, or Citizens Bank; refinance/consolidation will not be available with the lender who you originally borrowed from.
Those with National Collegiate Trust private loans will have to find a third party lender, as will borrowers seeking Navient loan consolidation for their privately backed student loans. Here are some of the main lenders who can refinance/consolidate your loan:
SoFi
- One of the first companies to refinance and consolidate student loans
- Interest rates between 2.63% – 7.75%
- Geared toward high income borrowers with very good credit profiles
- Reportedly aggressive with legal action towards defaulted borrowers
Wells Fargo
- A major, well known and established national bank
- Interest rates between 4.99%-9.99%
- 15 and 20 year repayment terms are available
- Not known as a particularly aggressive lender in terms of legal action against defaulted borrowers
Lendkey
- A lending platform that works with a network of regional, local, and national credit unions and community banks
- Interest rates between 2.58% – 8.12%
- Cosigner release option
- Credit union backed loans (private) are known to be aggressively targeted for post default collection efforts
CommonBond
- Started by MBA grads who had their own student loan debt
- Interest rates between 2.57%-7.25%
- They offer deferment and cosigner release
These are other lenders as well – when applying, you’ll want to shop around and compare rates, terms, and read user reviews who have gone through the process with that particular lender. You can find out more about Sallie Mae private loan forgiveness here.
Which Option Is Right For Me – Settlement, Refinance or Consolidation?
Whether or not refinance/consolidation versus settlement is right for you depends on both your eligibility and your goals. If your loans are defaulted, you have a low credit score, a high DTI Ratio, or no income; it’s highly unlikely that you will get approved for a refinance/consolidation with any lender. Instead, you may want to consider the other major debt relief option for loan borrowers – negotiating a reduced-sum payoff.
Loan Settlement
- Requires a lump sum or large down payment
- Requires you to be in default
- If current you must go through a strategic default which causes significant credit score damage until 1-2 years after settlement
- Results in significantly more savings than refinance/consolidation
- Pays off loan much faster than refinance/consolidation
- Cuts loan balance by 40-60% or more (depends on many variables)
Refinance/Consolidation
- Requires you to be current
- Requires good income
- Requires good credit score
- Requires good Debt To Income Ratio
- Will not cause drastic credit damage
- Less aggressive but still results in some net savings over time versus the original loan terms
- Will not interfere with short term plans to get a mortgage, auto loan, etc
Can You Discharge Your Loan Through Bankruptcy?
If neither of these options seem like a good fit for you, there are some other routes to attack your debt but you’ll have to think outside the box. Private loans are generally exempt from bankruptcy discharge under the 2005 BAPCPA; but there are exceptions for borrowers who have extreme financial hardship, disability, or even for those who have used private loan funds to pay for non-education related expenses.
Loans that are private cannot be discharged in bankruptcy without going through a complicated legal process called an Adversary Proceeding, which must be undertaken as part of the bankruptcy. There are not many bankruptcy attorneys who have experience in discharging student loans through an “AP”, and those that do usually charge upwards of $5,000 – $10,000 just to attempt it -with no guarantee of success.
Student loans can be packaged into a Chapter 13 bankruptcy as an extended “stalling tactic”, without the expectation of discharge. However, this will result in a great deal of interest being added to the loan during the bankruptcy, and the statutes of limitation can remain active if the loans receive payments during the bankruptcy. On the positive side, loans being entered into a bankruptcy will prevent a lender from pursuing legal action due to the “automatic stay” provision.
Final Thoughts
Refinance/consolidation is a viable, minimally aggressive option to net some savings and in some cases get a better monthly payment. Since the largest private lenders like Navient and NCT can be extremely inflexible and stick to high interest rates, it makes a lot of sense to look at other options.
The market for refinance and consolidation has come a long way since it was considered a form of relief just for high earning professions; but income, credit score, and credit history will continue to play a major factor in getting an approval – as well as a history of paying on time and keeping the loans in a current status with your original lender while you apply.
For borrowers who were turned down for a refinance or want a more aggressive approach, contact me today to see if you would be a good fit for settlement.